Can You Place a Life Insurance Policy in a Trust?

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A trust is often only as good the trustee in charge of it. Read on, as we examine the important role of the trustee and discover how to make sure yours is acting correctly, especially with complex instruments like insurance.

Trusts are frequently used in the estate planning process. They help with in the distribution of assets, making certain that everything is distributed to the right people and entities. This can be a great estate planning tool for parents with young children as it can direct the proceeds of the life insurance into a trust for the benefit of a surviving spouse for his or her lifetime with the balance passing to the children.

The peace of mind achieved by knowing that the children will be financially provided for regardless of the surviving spouse’s future relationships is a valuable trade off for the the relatively simple administrative steps and costs associated with properly setting up a life insurance trust.

Many people don’t know that you can even place a life insurance policy within a trust. Investopedia’s recent article entitled “Can You Trust Your Trustee?” explains that life insurance in a trust is called trust-owned life insurance (TOLI). A TOLI is like bank-owned and company-owned life insurance. Trustees often do a good job of completing basic tasks, but conflicts and problems can pop up when trustees don’t understand where their loyalties should be and how to deal with complex financial issues.

A trustee has a fiduciary responsibility to the beneficiaries of a trust. The trustee is required to manage the trust assets pursuant to the instructions of the trust for the beneficiaries.

TOLI beneficiaries usually have a desire to maximize the amount of wealth they will receive, when the trust assets are distributed. The trustee must, therefore, actively manage the insurance policy, or policies, that are owned by the trust. This includes determining if the policy is performing up to the projections reflected in the original life insurance illustration. It also requires the trustee to try to identify alternative policies that may be more in line with the desires of the beneficiaries. New life insurance products have made some policies sold in the past obsolete.

Trust-owned life insurance can have an important role in the estate plans of many people, but not all trustees have the bandwidth when it comes to insurance and estate planning to fulfill their fiduciary responsibilities. Ask an experienced estate planning attorney for assistance.

Reference: Investopedia (June 25, 2019) “Can You Trust Your Trustee?”

 

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